Negative effect of CRR cut on Indian cash rates

Mumbai: Indian overnight cash rates closed marginally lower on Thursday as the rush for funds waned and liquidity improved following a cut in cash reserve ratio (CRR) for banks that came into effect on Saturday.

Traders also expect cash rates to fall next week as the central bank's purchase of government debt via open market operation (OMO) scheduled for Friday will further reduce the cash deficit.

The one-day cash rate ended at 8.75/85 percent down from 8.85/8.90 percent at Wednesday's close.

"It seems like the CRR cut is slowly showing its effect and banks' asset-liability position is improving," said a trader with a large state-run bank.

"The big demand seen for funds at the start of every reporting cycle also seems to have died down."

Demand is typically strong in the first week of the two-week reporting cycle as most banks prefer to meet mandated reserve needs as early as possible to reduce exposure to likely volatility in the latter half of the period.

The central bank has bought about 719 billion rupees of bonds via OMOs since late November in a bid to offset the supply glut created by the government's massive borrowing plan for 2011/12.

The 50-basis point cut in the CRR to 5.5 percent is estimated to have released around 320 billion rupees into the banking system. The CRR is the share of deposits banks must hold as cash with the central bank.

Banks borrowed 1.20 trillion rupees from the RBI's repo auction under liquidity adjustment facility on Thursday, down from 1.27 trillion rupees on Wednesday and 1.41 trillion on Tuesday.

Volume in the call money market was 91.69 billion rupees, compared with Wednesday's volume of 117.75 billion, data from the Clearing Corp of India showed.

In the collateralised borrowing and lending obligation (CBLO) market, volume was 390.17 billion rupees, compared with Wednesday's total volume of 362.70 billion rupees.

The weighted average rate in the call money market was 8.96 percent, down from 9.07 percent previously.

In the CBLO market, the average rate was 8.41 percent, down from 8.51 percent.

In the inter-bank repo market, volume was 108.51 billion rupees, compared with 100.8 billion rupees on Wednesday. The weighted average rate was steady at 8.62 percent.

(Reuters)d, "If the railways are not modernized, then there is no way we can hold to our GDP growth. Whether it is seven percent or eight per cent, the railways have a major role to play."

On passenger safety, Trivedi said, "The signaling system has to be automated. At the moment there is human intervention at every stage. As long as there will be human intervention, there will be human error also. We have to minimize the humanintervention with complete automation in the system."

Giving comparisons with other railways, he said, "I am visualizing Indian Railways as a totally modern... as modern as European rail system or like Japan. In Japan for 47 years there was not a single train accident."

Referring to Train Protection Warning System (TPWS), he said, "In order to prevent accidents, TPWS is a must."

He expressed dismay over the time being taken for putting into use the anti-collision device (ACD) system. "ACD trial is going on for the last ten years as a pilot project. A pilot project cannot go on for ten long years."

Advocating for e-tendering and e-auctioning as part of the modernization exercise, Trivedi said the file movement should be less in the railways and "we should be doing it on e-mode because e-tendering and e-auctioning are more transparent. Our scrap should be sold through e-auction only."

He also mooted the idea of expanding the Railway Board to a nine-member body. Currently, it is a seven-member body including the chairman, he said, adding, "There should be a member revenue and member safety also."